What is a sole trader?

Posted on Apr 6th, 2018 | Company structure

As the term suggests, when operating as a sole trader you’re running your business as an individual. Being a sole trader merely means that there’s no legal distinction between the owner and the business.

As a sole trader, you’ll be –

  • Personally responsible for any losses your business makes
  • Personally responsible for any of your businesses bills
  • Personally responsible for keeping accurate records of your businesses sales and spending.

The tax responsibilities

To keep HMRC happy, sole traders need to do the following things –

As is the case for limited companies, failure to meet these obligations could mean hefty penalties.

So why be a sole trader?

Many freelancers begin as sole traders, due to the relative ease of setting-up and the comparatively small administrative burden involved.

The extra paperwork involved in going limited (Annual accounts, Corporation Tax Return etc.) is avoided as a sole trader. Operating in this manner is much simpler thanks to the fact that you’re only submitting a self-assessment (and perhaps a VAT return).

Accountancy costs can also be cheaper and you’ll avoid the constant menace of IR35 too, as these HMRC rules only apply to those operating as a limited company.

Disadvantages of being a sole trader

The biggest downside comes in the form of unlimited liability, meaning should your business incur any losses your personal property or belongings could be up for grabs by your creditors.

This can happen because, in the eyes of the law, there is no difference between the person running the business and the business itself. When it comes to chasing money owed by a business, a sole trader has to settle up. The sole trader is liable for any debts that the business incurs.

Sole traders are also subject to certain rules when it comes to naming your business. Sole trader names aren’t allowed to:

  • Include ‘limited’, ‘Ltd’, ‘limited liability partnership’, ‘LLP’, ‘public limited company’ or ‘plc’
  • Be offensive
  • Be the same as an existing trademark.

Sole trader names also can’t contain any ‘sensitive’ words or expressions, nor can the name suggest a link to any government or local authority – unless you get permission. Gov.uk provides a helpful list to what constitutes a ‘sensitive’ word, what names you can use and which ones you should steer clear of. Your business name will need to feature on any official paperwork, such as invoices.

Operating as a sole trader can be tax inefficient, and going limited could offer the potential for greater profitability once your earnings go over a certain threshold.

Greater employability and greater borrowing power can come with incorporating too, as banks and big business are generally more wary of doing business with sole traders.

The sole trader structure is often considered better for the rookie freelancer, whilst going limited will generally suit the more seasoned freelancer. An accountant can tell you when the right time might be to make the move to a limited company.

Is being a sole trader right for my business?

It depends, we’ve written an article on sole trader vs. limited company vs umbrella company that discusses the pros and cons. For personal advice on what is best for you, you should speak to an accountant. We offer a free consultation where our advisers guide you through this and more. You can call us on 0333 311 8000 or you can book a callback. We’ll be happy to help you find the right structure for your business.

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